Trump is creating a huge problem for the future of the auto industry

Donald Trump will be inaugurated as the 45th President of the
United States on Friday, and as the chief executive, he's put the
restoration of American manufacturing at the top of his agenda.

The crown jewel of US manufacturing is and always has been the
auto industry. But the industry has become extensively global, a
process that's actually nothing new for carmakers.

General Motors has had its Opel division in Europe since before
World War II. Countless Europeans grew up with small Ford cars in
their streets. The Japanese and German automakers have been
building cars in US factories for decades.

The management of vast, worldwide manufacturing operations means
that car companies can shift around the point of origin for their
vehicles, based on demand. This is the practice the Trump has
waded into, as he's assailed automakers for changing the way they
do business in the US, the world's most competitive car
market.

A changing market

Profits in the booming US market are with SUVs and trucks; small
cars have plummeted in popularity. So numerous carmakers want to
move small production to regions where labor costs are lower —
not so they can screw US workers out of jobs, but so they can use
their US workforce to build high-margin vehicles, while not
discontinuing their less profitable cars.

The real difficulty here is that the US market, after
booming for several years, is reaching the upper limit of demand
growth. The fact that there are still a lot of old cars on the
road means that US sales will probably remain high by historical
standards for a while, and Trump's economic policies could juke
demand a bit further on the consumer side.

What a sales boom looks like.Business Insider

Yet, while sales could get a boost from last year's record of
17.55-million vehicles, carmakers are reluctant to build new
plants or add jobs in the US now, for fear that they'll be stuck
with idle capacity and layoffs when the downturn inevitably does
arrive.

Industry executives are also mindful that they need to figure out
how to grow their businesses in the event of the US downturn.

Globally, that means investing in China instead of the US.

Big in China

China's auto market is already bigger than the US market, with
about 20 million annual sales. It could grow to 40
million. In any case, it's where the major future growth in auto
sales will be.

Ford, General Motors, and Fiat Chrysler Automobiles all want in
on that action. A river of investment will flow in the direction
of China — and a river already has. But this means partnering
with Chinese industry: a US automaker can only make and sell
vehicles in China through a joint venture with a Chinese company.

An auto show in China.REUTERS/China Daily

In practice, this also means that US car companies can use their
foreign manufacturing capacity to quickly satisfy US demand. For
example, Buick is a hugely popular brand in China. So when
General Motors needed to capture some crossover SUV demand for
the brand in the US, it could import a Chinese-made Buick, the
Envision.

Since imports began in mid-2016, sales heave steadily climbed,
hitting almost 4,000 vehicles in December.

For the record, the United Auto Workers wasn't happy about this
move. But if GM had adjusted US manufacturing to build the
Envision, it could have lost over 10,000 highly profitable sales
in 2016. To make matters worse, GM might have also had to shift
production around, with the understanding that
shifting passenger-car production to Mexico or even Canada
was a non-starter thanks to Trump's "America First" politics.

For automakers, no choice

Capacity expansion isn't going to happen in any meaningful way in
the US. But it is, and must, happen in China. US automakers — not
to mention the Volkswagens, BMWs, Toyotas, and the Mercedes of
the world — literally have no choice about this.
Taking a pass on a piece of 20 million in potential future
vehicle sales would be reckless business.

I know what you're thinking: Why not build the Chinese-market
vehicles here and export them, addressing the trade imbalances in
the process?

Workers
at a Ford truck plant.Bryan
Woolston/Reuters

That adds too many logistical and cost layers to the system. For
a huge part of the 20th century, carmakers established that
building cars where you sell them is the optimal arrangement. And
to use a 21st-century example, Tesla would very much like to set
up a joint venture in China to make its cars, rather than having
to deal with the headaches of exporting them from California, as
it now does.

There's a good chance that Trump will fixate on this. If Ford,
GM, and FCA all built new plants in the US, thousands of jobs in
states that went for Trump would be created. That additional
capacity could also add to GDP growth.

But it would be very high-risk capacity, given that there isn't
adequate future demand in the US market to support it.

So if you think it through, you can see how an unlikely
short-term win for Trump — new factories and new jobs in the US —
could at least in the car business become a long-term liability:
massive layoffs and an idled plant in Ohio or Michigan when the
downturn arrives, probably ... right around the time the 2020
election cycle is starting up, given the probable dynamics of the
current auto market in the US.

The automakers already know how to deal with the financial impact
of the US downturn: grow their market share in China (as well as
in other global markets). That wise analysis of their future
balance sheets isn't going to sit well, however, with President
Trump.